Practice Packet 1

The manager of Gloria's Boutique has approved Carla's application for credit. The maximum payment that has been approved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carla can make given this credit approval?

$1,331.42

Katie's Dinor spent $84,000 to refurbish its current facility. The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for five years. What is the amount of each monthly payment?

$1,401.49

Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting 1 year from today. What is the amount of each payment?

$10,462.15

Kristina started setting aside funds three years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved for her down payment?

$11,542.10

McClary Tires just decided to save money each year for the next four years to help fund a new building. If it earns 6.5 percent on its savings, how much will the firm have saved at the end of year 4? Year 1: $20,000 , Year 2: $24,000 , Year 3: $28,000 , Year 4: $32,000

$113,200.39

Doris's Fashions has just signed a $2.2 million contract. The contract calls for a payment of $0.6 million today, $0.8 million one year from today, and $0.8 million two years from today. What is this contract worth today if the firm can earn 8.2 percent on its money?

$2,022,709.37

You want to save $200 a month for the next 24 years and hope to earn an average rate of return of 11 percent. How much more will you have at the end of the 24 years if you invest your money at the beginning of each month rather than the end of each month?

$2,569.14

Compass Bank is offering 0.8 percent compounded daily on its savings accounts. If you deposit $2,500 today, how much will you have in the account in 15 years?

$2,818.74

A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?

13.53 percent

What is the effective annual rate of 14.9 percent compounded quarterly?

15.75 Percent

PayDay Loans is offering a special on one-year loans. The company will loan you $5,000 today in exchange for one payment of $5,900 one year from now. What is the APR on this loan?

18.00 percent

A new financial services company just opened in your town. To attract customers, it is offering a "9-11" loan special. The company will lend $9 today in exchange for a payment of $11 one year from today. What is the APR on this loan?

22.22 percent

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

annual percentage rate

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

charge interest annually

Which one of the following is an example of a perpetuity?

Trust income of $1,200 a year forever

Which one of the following has the highest effective annual rate?

6 percent compounded monthly

Julie is borrowing $12,800 to purchase a car. The loan terms are 36 months at 7.5 percent interest. How much interest will she pay on this loan if she pays the loan as agreed? Round your answer to the nearest whole dollar.

$1,534

Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest?

$1,666,666.67

What is the value today of $3,600 received at the end of each year for seven years if the first payment is paid at the end of year 3 and the discount rate is 12 percent?

$13,097.52

What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the end of this week.

$14,239.14

You will receive annual payments of $2,400 at the end of each year for 15 years. The first payment will be received in year 6. What is the present value of these payments if the discount rate is 7 percent?

$15,585.16

If you put up $46,000 today in exchange for a 6.75 percent 15-year annuity, what will the annual cash flow be?

$4,971.10

What is the effective annual rate of 10 percent compounded semiannually?

10.25 percent

Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?

12.00 percent

If today is year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 7.8 percent per year.

$40,822.55

The Men's Warehouse charges 1.6 percent interest per month. What rate of interest are its credit customers actually paying?

20.98 percent

Kurt wants to have $25,000 in an investment account four years from now. The account will pay 0.2 percent interest per month. If he saves money every month, starting one month from now, how much will he have to save each month to reach his goal?

$496.75

Belk Department Store charges a daily rate of 0.01 percent on its store credit cards. What interest rate is the company required by law to report to potential customers?

36.50 percent

Which one of the following qualifies as an annuity?

Auto loan payment

Capstone Investments is considering a project that will produce cash inflows of $11,000 in year 1, $24,000 in year 2, and $36,000 in year 3. What is the present value of these cash inflows if the company assigns the project a discount rate of 12 percent?

$54,578.17

If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows? Year 1: $21,600 , Year 2: $25,900 , Year 3: $38,700 , Year 4: $16,200

$78,270.77

Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?

$9,672.48

Identify four ways that you can use annuity computations in your everyday life.

Compute a loan payment Determine the amount you can afford to borrow to finance a major purchase Determine the amount you need to save on a regular basis to meet a personal goal Determine how much money you will have annually given a stated amount of retirement

First Trust offers personal loans at 7.7 percent compounded monthly. Second Bank offers similar loans at 7.75 percent compounded semiannually. Which one of the following statements is correct concerning these loans?

The First Trust loan has an effective rate of 7.98 percent.

You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?

$1,736.25

Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3? Year 1 : $500 , Year 2: $800, Year 3: $900

$2,309.80

Steve is considering investing $3,600 a year for 40 years. How much will this investment be worth at the end of the 40 years if he earns an average annual rate of return of 11.6 percent? Assume Steve invests his first payment of the end of this year.

$2,471,685.70

Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously delinquent so your firm has offered to arrange a payment plan in the hopes that it might at least collect a portion of this receivable. Your firm's offer consists of weekly payments for one year at an interest rate of 3 percent. What is the amount of each payment?

$2,706.33

Today, you are borrowing $13,800 to purchase a car. What will be your monthly payment amount if the loan is for four years at 7.5 percent interest?

$333.67

A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent compounded semiannually, what is the value of this annuity 4 years from now?

$37,139.58

Standards Life Insurance offers a perpetuity that pays annual payments of $100,000. This contract sells for $2,750,000 today. What is the interest rate?

3.64 percent

Today is your 21st birthday and you just decided to start saving money so you can retire early. Thus, you are going to save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn an average of 8 percent on your savings, how old will you be when you retire?

54.39 years old

You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?

6.37 years

What is the effective annual rate of 6.5 percent compounded quarterly?

6.66 percent

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Annuity

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

Annuity B has both a higher present value and a higher future value than Annuity A.

Which one of the following statements is correct?

The EAR, rather than the APR, should be used to compare both investment and loan options

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?

To compute the initial loan amount, you must use a monthly interest rate.

Which of the following will increase the present value of an annuity, all else held constant? I. Increase in the number of payments II. Increase in the interest rate III. Decrease in the interest rate IV. Decrease in the payment amount

I and III only

Which of the following characteristics apply to a perpetuity? I. Constant cash flow dollar amount II. Unequal cash flow dollar amount III. Limited time period IV. Infinite time period

I and IV only

Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?

Pure discount loan

Today, you are borrowing money from your local bank. The loan is to be repaid in one lump sum payment of $15,000 one year from now. How much money are you borrowing today if the APR is 10.6 percent?

$13,562.39

Given an interest rate of 5.85 percent per year, what is the value at year t = 8 of a perpetual stream of $2,500 payments that begin at year t = 25?

$17,208.00

How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent.

$187,391.34

A local magazine is offering a $2,500 grand prize to one lucky winner. The prize will be paid in four annual payments of $625 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 9 percent on your money?

$2,024.82

You want to buy a new sports coupe for $84,600, and the finance office at the dealership has quoted you a 7.1 percent APR loan for 48 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

$2,029.78; 7.34 percent

Appalachian Bank offers you a $135,000, nine-year term loan at 7.5 percent annual interest. What will your annual loan payment be?

$21,163.57

Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the required return on this investment is 4.75 percent, how much will you pay for the policy?

$210,526.32

Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from today. How much should she pay for this investment if she wishes to earn a 13 percent rate of return?

$22,113.05

Amish Bakery needs $210,000 today to fund a new project. The project will not produce any cash flows for two years and thus the firm agreed to a two-year, pure discount loan at 7.5 percent interest. How much will the firm owe on this loan at the time it must be repaid?

$242,681.25

Kris will receive $800 a month for the next five years from an insurance settlement. The interest rate is 4 percent, compounded monthly, for the first two years and 5 percent, compounded monthly, for the final three years. What is this settlement worth to him today?

$43,066.22

Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months?

$443.13

Slaughter Industries just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 6 percent on its savings? Year 1: $84,000 , Year 2: $113,000 , Year 3: $125,000 , Year 4: $130,000

$489,512.14

At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?

$566,190.22

Webster Mining is considering the purchase of a new sorting machine. The quote consists of a quarterly payment of $29,600 for seven years at 8 percent interest. What is the purchase price of the equipment?

$629,925.66

You have an outstanding loan with an EAR of 14.6 percent. What is the APR if interest is compounded monthly?

13.71 percent

Radio Shack offers credit to its customers and charges interest of 1.2 percent per month. What is the APR?

14.40 Percent

A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?

14.56 Percent

Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of 7.75 percent and monthly payments of $310. Your financial situation recently changed such that you can no longer afford these payments. After talking with your banker and explaining the situation, he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 percent. How much longer will it take you to repay this loan than you had originally planned?

15.84 months

The Townhouse Galleries offers credit to its customers at a rate of 1.6 percent per month. What is the effective annual rate of this credit offer?

20.98 percent

Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?

41.79 months

Which one of the following is the annuity present value formula?

C × {{1 - [1/(1 + r)t]}/r}

Which one of the following will decrease the present value of an annuity?

Decrease in the annuity payment

Which one of the following can be classified as an annuity but not as a perpetuity?

Equal annual payments for life

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?

Perpetuity

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?

Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

When comparing savings accounts, you should select the account that has the:

highest effective annual rate

Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n):

pure discount loan

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

will be greater than 12.9 percent